Buyers were told the money would be used to install solar panels in 40 sites across the UK. Photograph: Terry Mathews/Alamy

Nearly 1,000 small investors who put a total of £7.5m into “secured” energy bonds which promised to pay an income of 6.5% a year are unlikely to see a penny of their money back after it emerged the cash was siphoned off to an Australian company that later went bust.

Secured Energy Bonds were launched in November 2013, with the lure that they were an “environmentally friendly and locally sensitive way” to invest. Buyers were told the money would be used to install solar panels on schools across the UK.

But panels were installed at only six schools of the initial 22 schools planned, as the money raised from investors went instead to shore up the worsening financial situation at the parent company, CBD Energy. Accountants Grant Thornton, administrators to CBD Energy, said: “During financial year 2014 CBD used funds of a subsidiary company, Secured Energy Bonds plc, in contravention of the purpose of these funds, to meet the group’s cashflow shortfalls.”

CBD Energy is an Australian firm controlled by controversial entrepreneur Gerry McGowan, who set up the country’s first budget airline, Impulse Airlines. He later sold it to Qantas, which used it as the basis for Jetstar. But in October last year McGowan took a leave of absence while the board investigated if the accounts needed restating. Then in November, CBD Energy went into administration. In the same month McGowan sold his Double Bay, Sydney penthouse apartment for a price understood to be above AUS$7m (£3.6m).

Grant Thornton said CBD was effectively insolvent from June 2014, and could not meet its liabilities as early as June 2013. Yet British investors were being told throughout this period to “Make an ethical, more secured investment in renewable energy and enjoy the financial rewards.”

Investors only learned of the company’s failure when a quarterly interest payment, due on Monday this week, was missed. The investors have no rights to compensation as the bonds are treated the same as shares, and are not covered by the UK’s Financial Services Compensation Scheme.

Hopes that there will be any assets to be recovered are dwindling. At the bond’s launch, its promoters said investors would “enjoy a level of security not previously associated with this type of bond”, as the income was secured against “the solar projects, their income flow and the company’s cash reserves. CBD will also give a corporate guarantee”.

A London firm called Independent Portfolio Managers (IPM), regulated by the Financial Conduct Authority, was appointed as the “security trustee” responsible for safeguarding the interests of bondholders in the event of default. It issued a statement that it only became aware of problems in November 2014, and is now seeking to put Secured Energy Bonds into administration. “The timing and amount of payments are, at this stage, uncertain,” it said. However in Australia, Grant Thornton said “the investment is likely to be substantially impaired”.

The failure of Secured Energy Bonds is the first major test of the “retail bond” market that has exploded in popularity in recent years. With interest rates at rock-bottom lows, companies as diverse as Tesco Bank and the Jockey Club have issued bonds paying interest of 5% or more to investors desperate for higher income. SEB was structured as a “mini-bond” that could not be traded. Critics warned that investors were buying without sufficiently examining the risk of defaults.

Trillion Fund, a popular crowdfunding platform for renewable energy projects, acted as a lead generator for Secured Energy Bonds, and its failure was “deeply disappointing”. It added that it no longer promotes mini-bonds.

In October 2013, city regulators announced a clampdown on aspects of the retail bond industry, saying that they should only be marketed to “sophisticated investors” or to clients of FCA-authorised advisers and managers.